Iceland: IMF warns Iceland on budget

The IMF warned Iceland on Wednesday that it was likely to overshoot its spending targets and that the measures it implemented to overcome its banking crisis were affecting increase.

"On current trends, the 2013 budget deficit target will be missed owing to slower than projected increase, spending overruns, and lower-than-budgeted dividend payments and investment sales," said the Fund next its regular annual review of the country.

Next the arrival of a centre-right government to power in May the Fund has expressed some skepticism of its priorities.

"The existing target of a balanced budget in 2014 may as well come under pressure from costly electoral promises - inclunding those to lower taxes and to increase household deficit relief - the financing for which remains uncertain," added the Fund.

While the IMF and Icelandic government have similar forecasts for increase for 2013, at 1.8 and 1.9 %, the IMF believes Iceland will grow by 2.1 % next year while Reykjavik is still predicting 3.0 %.

The Fund said that "legacy vulnerabilities are weighing on increase". The country let its highly-leveraged banks go bust at the onset of the world financial crisis in 2008, which caused a massive slump but avoided the country going bankrupt.

The IMF noted that Iceland has still only made limited evolution on lifting capital controls imposed in 2008.

While the position of banks had improved, it noted they were currently dependent upon short-term funding and deposits trapped by the controls.

The Fund said "legacies of the crisis continue to pose challenges that must be addressed to reinforce the foundations for durable increase".